Hotel feasibility studies

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Hotel Feasibility Analysis

The goal of this lesson is to provide the learner

with an understanding of the process of

performing a hotel feasibility study, as well as

the importance of such a task

Srikanth Beldona, Ph.D.

components of a Hotel Feasibility Study

important financial determinants

What is a Feasibility Study?

proposed hotel must be investigated, estimated, documented and

supported, so that the client can be assured that the proposal is justified

Feasibility Studies

components

(1)Preparation of a market feasibility

study for the project

(2)Estimation of costs for all elements

of the project and

financing

Two Phases of a Hotel Feasibility

Study

Site Selection

□Business and Trade Centers, Highways,

Traffic Levels, Key Attractions, Shopping Centers, Population Backup

□Site Specific

□Size, Zoning Laws, height restrictions

and parking requirements, Visibility,

Accessibility

Competitive Area Property

Spread

Traffic Count of Competitive

Market Area

Why Location & Size are

important

What today’s travelers want

The Market

□Statistics on visitor arrivals

□Expected changes

location

Market Breakdown Template

Construction Trends Template

Area Lodging Facilities

Property Analysis

Area Lodging Facilities Room Rate Analysis

Rate Analysis : Single and Double Occupancy

Area Lodging Facilities Amenities Analysis-I

Area Lodging Facilities Amenities Analysis-II

Area Lodging Facilities

Overall Property Evaluation

Segment Breakdown

Area Lodging Facilities Property Support Analysis

Area Lodging Facilities

Seasonal Occupancy Analysis

Estimated Area Occupancy

Template

Understanding Demand

Projected Demand

Breakdown

Projected Occupancy Outline

Projected Market Support

Labor Situation

□especially at the middle-management or

supervisory level

benefits, Wage trends, etc

prepared to bargain in good faith

The Hilton Garden Inn

http://www.hiltongardeninnfranchise.com/

Cost Elements of a Project

□Land

Cost of Land

□Depends on whether land is actually purchased or owned

□Cost of land typically weighed based

on the number of rooms in hotel Can range from $500 per room to as high

as $30,000 or $40,000

□Taxes during construction and costs of clearing the land factored into overall cost.

Cost of Construction

□ Largest cost element in any hotel project

□ If franchised, have to adhere to franchisor specs

□ $60,000 per-room cost of construction is

considered satisfactory (Prevailing market

scenario without interest).

□ Fixed-price contract

□ Cost more controlled, difficult to get because of the

inflation prevalent both in labor and in construction materials, this is not often feasible

□ Cost-plus contract

□ Contractor’s profits are a percentage of the costs

Maximum ceiling on cost can be written into contract.

Costs Pertaining to Furniture, Fixtures, and

Equipment

□Either developer buys from one-stop shop

supplier or spreads out across several

suppliers.

□Front of house and back-of-the-house

equipment

□air-conditioning or heating, is considered to

be part of the construction cost.

□$12,000 per room for furniture, fixtures, and

equipment is considered acceptable (Of

course depends on brand)

Operating Equipment

□Linen, silver, china, glass ware, and,

in some instances, uniforms

acquired

□ Excessive inventories can tie up capital and create

additional interest costs

□ 6,000 per room of for operating inventories should

be considered satisfactory.

Pre-opening Expenses

□Prior to the opening of a hotel,

expenses incurred for

□Pre-opening payroll, training costs,

advertising, and sales expenses and

travel

□To be factored into overall budget

□Depends on the pre-opening

philosophies of the operator

□$3,000 per room is considered optimum

Working Capital

and operating expenses

(unpredictable time period)

firm

room

Franchising Fees

□If the project is a franchise, total cost

and fee structure to be clear

□http://hvs.hotelmotel.com/Intro.asp

Sources of Financing

□ Marginal support (reducing a lot) from banks,

mortgage lenders, and insurance companies

□ private groups of investors (Largest source of

funding presently )

□ World Bank or the Export—Import Bank for hotel

and tourism development in various areas

□ governmental or tourism bodies in an effort to promote tourism in a specific country.

□ Federal agencies, such as HUD, and state

developmental agencies will provide financing.

□ Low-cost loans in the United States by state or

city to assist in area development.

Important Financial

Determinants

□Net Operating Income

□Operating income is the profit realized

from a business' own operations

□NOI = Operating Income * (1-tax

rate)

□NOI = EBIT * (1-tax rate)

□EBIT is Earnings before Interest

and Taxes (EBIT)

Important Financial

Determinants

□Interest Carry Ratio = Net

Operating Income / Loan Amount

($100,000 / 750,000 = 13)

maximum interest rate that a loan's cash flow could carry This example shows a 13% interest rate The cash flow is great for this example

Important Financial

Determinants

□Debt Service Coverage Ratio = Net

Operating Income / Debt Service

($100,000 / 65,601.47 = 1.52)

□The higher the debt service coverage,

the less risky the loan Typical debt

service coverage requirements range from 1.1 to 1.25 A 1.52 ratio reflects a good investment

Rule of Thumb

Total Cost Per Room (Total Project

Cost/100 Rooms)

$ 73,836.80

ADR to Determine Feasibility